Why Some Buyers Are First-In-Line For Second-Hand Stores
Printed in USA Today
by Nancy Rathbun Scott
When Brian Greenley purchased his second-hand MAACO, it was on the verge of bankruptcy. Under Greenley's ownership, the shop grossed $1.6 million the first year. The store now boasts the third highest sales volume in the chain. The lesson? Buying an existing franchise can be more advantageous than starting a new one, even if the location is failing.
"It's a matter of matching the right person with the right business and knowing what questions to ask," says Bill Chaffee, MAACO's vice-president for franchise development. "It takes a special person to buy an existing business-one who can see the forest and eliminate the trees."
What's the advantage?
Significant advantages go along with buying an existing franchise location, say many who have done it. "You can review actual operating results that give you a good idea of all the costs," Greeley says. "Nothing is hidden and the center's track record enables you to identify any problems from the beginning."
The existing customer base-no matter how shaky-starts you off with immediate cash flow, too. "A franchise always has a customer base, and any bad customer feeling is easy to overcome by putting out good work. The opportunity is always there to make more, happier customers."
New management of an old store often runs on the fast track, too. Trained employees are in place, giving the new owner time to introduce changes in the workforce gradually, without interruption of service. The line of suppliers and credit is already established. Licenses and permits generally transfer easily, and even if the new owner does have to reapply, previous approval of the business pretty well guarantees acceptance. Also, the new owner can benefit from the seller's experience, avoiding mistakes and profiting from successes. Finally, the seller is available to familiarize the new entrepreneur with operations and make introductions to customers and suppliers. And don't forget money. The seller may be willing to give the new owner some financing.
Old franchises may have old problems
Despite advantages, resales carry issues that wouldn't come up in the purchase of a new location. For example, Chaffee recommends scrutinizing the location's existing debt structure carefully, with an eye to taxes owed and liens on the property. An experienced attorney can best perform the lien search, he says. Buyers also need to be advised of any bulk sales transaction occurring within ten days prior to the sale. A knowledge of existing customer relations is especially important: pending lawsuits, customer complaints, or work in progress. And don't forget to inquire about the length of time remaining on the property lease.
In short, asking the right questions before you buy is important. Many suggestions show up in Buying the Right Business Right, co-authored by Dennis D'Annunzio, owner of Sunbelt Business Brokers Network. He points out that franchise agreements commonly grant the franchisor the right of first refusal in a business location resale. This means that, if the franchise company is looking to expand company-owned stores, the prospective buyer could waste time researching and making an offer, only to come up empty handed when the franchisor decides to exercise its legal right to match the offer. "The expertise of a broker can guide you through transfer and right-to-purchase requirements," D'Annunzio says.
The right of first refusal, while common in most franchise contracts, doesn't have to be a problem, though. Al Hornstein, MAACO's director of public relations, says companies like MAACO only take over a location when no ready buyer waits. "MAACO doesn't compete with anyone who wants to own a center-and most franchisors don't."
Read the paper, talk to the franchisor
To find existing franchises for sale, check with owners to see if someone might be selling a location independently. Be aware that-even if you and the seller come to terms-the franchise company almost always reserves the right to accept or reject you as a franchisee.
Ask the franchise development department of franchise companies about existing units for sale, too. Hornstein says MAACO frequently assists in resales. Don Fertman, director of franchise sales for Subway, gives prospective owners a choice between buying an existing store or setting up a new one. In fact, in a large system like Subway, existing stores may be all that's available in saturated markets.
Expect the same training and advantages
Franchise companies offer equivalent training to buyers, whether the sale is of a new or existing franchise. By the time training occurs, the sale is fairly sure to consummate. Prospective franchise owners usually don't pay for training, but they may have to pay for food and lodging during the course. So, while theoretically, the sale could stall after training and before closing, most reputable franchise companies have weeded out bad seeds long before training occurs. As Fertman puts it, "The already-prepared transfer paperwork only awaits successful completion of training before final execution."
New owners of old stores do well
Two factors help put a failing franchise on its feet: help from the franchise company and energy from the new owners.
Donna and Ken Corey own a Subway shop near Worcester, MA. Both the Coreys and MAACO owner Brian Greenley bought from owners of multiple locations who weren't devoting full attention. Both got help from their franchisors.
"MAACO agreed to a one-year co-ownership in my case," says Greenley, who was just out of high school when he made his purchase. With only $15,000 to invest, Greenley nevertheless brought boundless energy and a positive commitment to his new enterprise. "I studied the MAACO system and knew it was possible to hit the million dollar mark."
Subway also helped the Coreys buy. "They told us what steps to follow, what forms to fill out, and gave us leads on financing."
Both Greenley and the Coreys agree that, while franchise name recognition brings in the customers, only the owners' personal ability will keep customers. That's why the fervor of new owners often can save a failing store, they say.
Like the Coreys, Greenley had worked as an employee at the franchise he bought. As the owner, he could impact the quality of his employees and institute efficient cost controls, he says. That helped him make money 48 out of his first 52 weeks in business, even though the store had never made money in its six years of existence. "It's important to apply yourself. The system is there but you have to set a goal and work toward it. You must give it the energy. You must expect something out of it or you won't get anything."
The Coreys halted their Subway shop's downturn within the first two weeks of ownership and sent sales rising thereafter. They credit attention to detail, freshness, cleanliness, customer service and smiles, smiles, smiles! "Our hand-picked employees act on our philosophy that a customer is never an interruption," Donna Corey says.
Subway's Don Fertman isn't surprised. While not all franchise locations for sale are distressed-some very successful sellers simply want to retire-a good new owner in either case generally increases sales by over five percent from the outset," he says. "The new owner just brings a new enthusiasm and commitment that makes all the difference."
MAACO's Chaffee concurs. "Typically, in a resale we see volume go up 25 to 30 percent and profits accordingly, because the new owner brings to it an immediate burst of creativity and energy. Anyone with experience who understands-and is willing to follow-the system can turn a business around. The purchase of an existing franchise location can be an excellent opportunity."
Franchise Marketplace Adds Biz Resales
People shopping for a business opportunity-franchised or not-will find digital gold waiting at USAToday.com's "Marketplace." On January 1, the popular web site expanded to list independent business resales, as well as existing franchise businesses on the market.
The business resales portion of the site pulls in over 4,000 listings from Sunbelt Business Brokers. As a company with 130 franchised business brokerage offices nationwide, Sunbelt adds a new dimension to the already successful site. Both brokers' associations and business owners wanting to sell stores feed into the listings. Shoppers benefit because brokers use the nationally recognized internet address to market businesses for their clients.
According to Calvin Haskell, owner of Franchise Solutions, who partners with USAToday in managing the site, prospective entrepreneurs now can click to one-stop business shopping. "If you're looking to buy a business of any kind, this is the place," Haskell says.
Dennis D'Annunzio, Sunbelt's CEO, describes the possibilities. "Business opportunities in the database are searchable by state, city, broker and industry type, and each listing under 'Business Resales' contains information on sales volume of business, years in business, asking price, cash flow, down payments and owner financing." Each business listing includes the name of the contact, so searchers can deal directly with the business owner or go through a business broker.
In addition to the new business resales listings, the site delivers basic information about financing, candid interviews with the heads of leading companies, and a selection of articles with tips about getting into business. Visitors also can sign up to receive a free newsletter called "The Franchise Business Opportunity Express"-a feature-packed, easy-to-read "ezine" published by USAToday and Franchise Solutions and delivered by email biweekly. In the months ahead, D'Annunzio expects to add interactive business valuation software to the feature-laden site.
Even before Sunbelt put up its nationwide list of businesses for sale, the USAToday/Franchise Solutions site was generating tens of thousands of "hits" per month from franchise shoppers. In November alone, 68,000 prospective entrepreneurs clicked in, making this section of USAToday's Marketplace their most visited online section.
But mere "hits" don't tell the whole story. Haskell says Franchise Solutions has been gathering about 1,500 lengthy questionnaires a month from people looking to buy a franchise. The questionnaire option has proven popular because, once a shopper clicks the "Free Franchise List" button, fills out the questionnaire, and submits it online, a custom-tailored list of all available franchises matching the shopper's interests and finances arrives by return email.
Haskell says, "There can be no doubt; whether you are thinking of buying an existing franchise or any other current business, USAToday's Marketplace is the first-and best-option."

® copyright 1999 Nancy Rathbun Scott
Do not reprint without permission